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Every quarter the FTSE set of indices (incl. FTSE 100 and FTSE 250 indices) are reviewed and the component stocks changed if required.

Elsewhere we have looked at the impact on the share prices of companies entering or leaving the FTSE 100 Index, here we look at the FTSE 250 Index.

Companies leaving the FTSE 250 Index

The charts below show the share price behaviour of nine companies that left the FTSE 250 Index (relegated to the FTSE Small Cap Index, not promoted to the FTSE 100 Index). The time period for each chart is 30 trading days, starting from 15 days before the index review announcement. The vertical line in each chart indicates the announcement day of the company leaving the index (this is the date under the company name).

It can be seen that, in most cases, the share price falls (quite sharply in some cases) in the few days immediately before the index review announcement, then rises in the few days following the announcement, and then falls again five or six days after the announcement.

Companies joining the FTSE 250 Index

The charts below show the share price behaviour of nine companies that joined the FTSE 250 Index (promoted from the FTSE Small Cap Index, not relegated from the FTSE 100 Index). As above, the time period for each chart is 30 trading days, starting from 15 days before the index review announcement. The vertical line in each chart indicates the announcement day of the company joining the index (this is the date under the company name).

It can be seen that, in most cases, the share price rises in the six to ten days before the announcement; following which the price either trades flat or falls back.

Analysis of the historic data shows that although the FTSE 250 Index has greatly out-performed the FTSE 100 Index in the long-term (since 1986 the FTSE 100 has increased 367% compared to an increase of 1052% for the FTSE 250) there are certain months for which the large-cap index on average out-performs the mid-cap index. We will look at a strategy that exploits this feature.

The following reproduces the chart showing the monthly out-performance of the FTSE 100 over the FTSE 250 Indices. For example, in Januaries since 1986 the FTSE 100 has on average out-performed the FTSE 250 by -1.5 percentage points.

As can be seen, there are only two months, September and October, in which the FTSE 100 convincingly out-performs the FTSE 250.

The above results suggest a strategy of investing in the FTSE 250 for the year but switching into the FTSE 100 for just the two-month period September-October. In other words, the portfolio would be invested in the FTSE 250 from January to August, at the end of August it switches out of the FTSE 250 and into the FTSE 100 for two months, then back into the FTSE 250 until the end of August the following year.

The following chart shows the result of operating such a strategy from 2000. For comparison, the chart also includes the portfolio returns from continuous investments in the base FTSE 100 and FTSE 250.

The result: the FTSE 100 portfolio would have grown -5%, the FTSE 250 risen +153%, and the FTSE 100/FTSE 250 monthly switching portfolio would have increased +237%. These figures do not include transaction costs, but these would not be significant as the strategy only requires trading twice a year.

Recently we have looked at the monthly seasonalities of the FTSE 100 and FTSE 250 Indices. Here, we will look at the comparative monthly performance of the FTSE 100 Index against the FTSE 250 Index.

The following table shows the out-performance of the FTSE 100 over the FTSE 250 for every month since 1986 (the year of introduction of the latter index). For example, in January 1986 the FTSE 100 month return was 1.6%, that for the FTSE 250 was 2.6%, and so the out-performance of the FTSE 100 over the FTSE 250 was -1.0 percentage points. Negative values (i.e. those months when the FTSE 250 out-performed the FTSE 100) are highlighted with a blue cell background.

As can be quite clearly seen the FTSE 250 has been strong relative to the FTSE 100 for the three months January to March.

This can also be seen in the chart below which shows the average FTSE 100 out-performance of the FTSE 250 for each of the 12 months since 1986. For example, on average in January the FTSE 100 has under-performed the FTSE 250 Index by 1.5 percentage points.

This average comparative chart shows that the FTSE 250 has been significantly strong relative to the FTSE 100 Index January-March, and relatively weak September-October.

The following table shows the month returns for the FTSE 250 Index for every month since the index was introduced in 1986. For example, in January 1987 the FTSE 250 Index rose 9.5%. Negative month returns have been highlighted with a blue cell background.

A quick glance at the above chart suggests that strong months for the FTSE 250 Index have been February, April and December; while weak months have been June and September.

These observations are supported by the chart below which shows the average month returns for each month 1986-2014.

From this chart we can see the FTSE 250 Index has historically been strong the five consecutive months December-April. Its weakest month is September (an average month return of -1.7%), and its strongest month December (+2.8%).

See also

A brief overview of the range of indices that FTSE International (FTSE) have created to measure the equity markets in the UK.

FT Ordinary Share Index (FT30)

The FT30 Index was first calculated in 1935 by the Financial Times newspaper. The Index started at a base level of 100, and was calculated from a subjective collection of 30 major companies – which in the early years were concentrated in the industrial and retailing sectors.

For a long time the Index was the best known performance measure of the UK stock market. But the index become less representative of the whole market. Also the index was price-weighted (like the DJIA), and not market-capitalisation-weighted. Although the index was calculated every hour, the increasing sophistication of the market needed an index calculated every minute and so the FT30 has been usurped by the FTSE 100.

FTSE 100

Today, the FTSE 100 Index (sometimes called the “footsie”) is the best known index tracking the performance of the UK market. The index comprises 100 of the top capitalised stocks listed on the LSE, and represents approximately 80% of the total market (by capitalisation). It is market capitalisation weighted and the composition of the index is reviewed every three months. The FTSE 100 is commonly used as the basis for investment funds and derivatives. The index was first calculated on 3 January 1984 with a base value of 1000.

The FTSE 100 Index, and all the FTSE indices, are calculated by FTSE International – which started life as a joint venture between the Financial Times newspaper and the London Stock Exchange, but is now wholly owned by the LSE.

FTSE 250

Similar in construction to the FTSE100, except this index comprises the next 250 highest capitalised stocks listed on the LSE after the top 100. The index is sometimes referred to as the index of “mid-cap” stocks, and comprises approximately 18% of the total market capitalisation.

FTSE 350

FTSE Small Cap

Comprised of companies with a market capitalisation below the FTSE 250, but above a fixed limit. This lower limit is periodically reviewed. Consequently the FTSE Small Cap Index does not have a fixed number of constituents. In mid-2012, there were 248 companies in the index, which represented about 2% of the total market by capitalisation.

FTSE All-Share

The FTSE All-Share is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap indices. Effectively all those LSE listed companies with a market capitalisation above the lower limit for inclusion in the FTSE Small Cap Index. The FTSE All-Share Index is the standard benchmark for measuring the performance of the broad UK market and represents 98-99% of the UK market capitalisation.

FTSE Fledgling

This index comprises the companies that do not meet the minimum size requirement of the FTSE Small Cap Index and are therefore outside of the FTSE All-Share Index. In mid-2012 there were 112 companies in the FTSE Fledgling Index.

5. Question

When the sun shines do you find yourself hovering over the trading screen enthusiastically adding stocks to your portfolio? Or on cloudy days when the rain beats against the window do you sit morosely at your desk, your finger stabbing at the sell button?

Two academic papers seem to think this is how you behave. The first paper[1], published in 2003, analysed 26 international stock exchanges and found that sunshine was “strongly positively correlated” with market index returns. The authors attributed this to sunny weather fostering an “upbeat mood”. They even claimed it was possible (after trading costs) to trade profitably on the weather. A second paper[2], published in 2007, found that the sunshine effect was stronger for stock exchanges further away from the equator (e.g. exchanges in dark, gloomy northern European countries), and that the effect did not exist on the equator itself.

This seemed a fun and easy topic to study, so we dived in.

The chart below plots daily sun hours (at Heathrow) against the FTSE 100 Index return on the same day.

At first glance, you might think that the chart shows no correlation between the two series (i.e. sun hours and index returns). And you’d be right. Even second or third glances will not reveal any positive correlation. In fact, if you look very closely and squint, you may even see a negative correlation – which is not at all what we want.

We should have stopped there. But we were motivated to find some correlation. We’d read the academic papers and also paid a reasonable amount of cash for the weather data (stock tip: if the Met Office is ever privatised…).

So, on we went.

Perhaps the effect does not exist for the FTSE100 Index which, after all, is heavily influenced by foreign investors, who are trading from their pools in the Caribbean or skyscrapers in Shanghai and who are unlikely to be affected greatly by how sunny it is in Orpington. So, we looked at sun hours and the FTSE 250 Index – an index more closely reflecting UK PLC and possibly attracting more domestic investors.

No, no correlation.

Perhaps the effect really displays itself for smaller stocks? We drafted in the FTSE Small Cap Index.

No correlation.

The AIM market – home of optimistic punters with a sunny disposition. Surely, the sunshine effect will reveal itself there?

Nothing.

OK. Let’s start manipulating the data.

We calculated the average daily sun hours for the winter and summer periods, and then adjusted the daily sun hours data by calculating the daily divergence of sun hours from their seasonal average. After all, just two hours of sunshine in the winter could be considered a sunny day. That should do it.

No.

We limited the analysis to just those days with extremes of sunshine (i.e. daily sun hours one standard deviation away from the average).

Nothing.

Perhaps the change in sun hours from one day to the next would work? In other words, the effect would kick in when a sunny day followed a cloudy day, or vice versa.

Nada.

In desperation to rescue something from all the research, we looked at sun hours against daily trading volumes. If the curmudgeonly UK investor wasn’t inspired by the sun to increase his net equity exposure, perhaps he at least punted around a bit more. Well, finally, on this one…….

No. No correlation.

At the end of everything the best we could do was the chart below – the FTSE 250 Index plotted against the change in sun hours from the previous day.

Hardly much of an improvement on the first chart – still just a random mass of uncorrelated dots. At least the correlation is (minutely) positive, but we wouldn’t recommend trading off it.

Summary

So, who is wrong, the papers or our research?

It’s difficult to say. Our data covered the period 2007-12, while the first academic paper looked at data for the period 1982-97. Possibly the effect has changed in the intervening years.

But if the academic papers are right, and the sunshine effect does exist, this would seem to conflict with the strongest seasonality effect in the market – whereby the market in the (dark) winter months out-performs the (sunny) summer months.

Tricky thing, the market.

[1] Hirshleifer, D. and T. Shumway (2003). Good day sunshine: Stock returns and the weather. The Journal of Finance 58 (3)

[2] Keel, S. P. and M. L. Roush (2007). A meta-analysis of the international evidence of cloud cover on stock returns. Review of Accounting and Finance 6 (3)

The following chart plots the monthly returns of the sterling/US dollar (GBPUSD) exchange rate against the FTSE 100 Index for the period 1971-2012.

As can be seen there is very little correlation. Changes in GBPUSD have no consistent influence on the FTSE 100 Index on a monthly basis.This is not period-dependent, a chart for the more recent period 2000-2012 is little different.

The following chart is similar, except instead of the FTSE 100 it plots the FTSE 250 Index against GBPUSD (this time for the period 1985-2012).

Equity and commodity markets

The following chart shows the returns on a range of international stock markets and commodities in 2012.

Notes-

The German market was the strongest (+29.1%), followed by the Asian markets of India, Japan, and Hong Kong.

The FTSE 100 was ranked 22 out of the 25 markets appearing here.

Over half the markets increased by more than 10% in 2012.

Currency markets

The following chart shows a sample of currency moves against the British pound in the year. For example, the British pound increased 16.5% against the Japanese Yen, and fell in value 6.7% against the Polish Zloty.

Equity and commodity markets (sterling)

The following chart shows the returns on the same range of markets shown above, but this time in sterling terms (i.e. showing the returns for a UK investor).

Notes-

The German market remains the strongest for 2012, with its returns reduced from 29.1% to 26.4% due to the slight appreciation of GBP against EUR over the year.

A big difference is the return for the Nikkei Index in sterling terms – falling from 22.9% to 5.5%.